Rate increases in the US means the Hong Kong Monetary Authority will need to battle to defend the local currency in 2016 to prevent the local dollar from becoming too weak because of capital outflows.
HKMA chief executive Norman Chan Tak-lam has warned the US interest rate rise cycle which started in December and expected to continue next year will lead to some US$130 billion in hot money outflows from the city. The HKMA is the de facto central bank of the city.
“This outflow means the Hong Kong dollar will weaken. The HKMA will defend the peg when the currency weakens to the 7.85 (to the US dollar) level. The last time the authority needed to prevent the (Hong Kong) dollar from dropping through this level was 10 years ago,” Chan said.
This year, the HKMA has spent HK$227.15 billion to weaken the Hong Kong dollar in defending the peg, which was introduced in 1983 and kept the Hong Kong dollar with the US dollar at as rate of around HK$7.8 to the greenback. The HKMA will intervene whenever the currency trades beyond the range of 7.75 to 7.85.
The system was introduced in 1983 to keep the currency stable at that time to maintain confidence as China and Britain negotiated the handover of Hong Kong in 1997.
The HKMA has had to intervene to defend the peg from time to time by tapping into the Exchange fund, which now has HK$3.27 trillion. This year, the HKMA had two rounds of interventions to weaken the Hong Kong dollar against the US dollar.
This first round was for a total of HK$71.49 billion in April during a rally in Hong Kong’s stock market from April 9 to 27 which saw average daily market turnover triple to HK$200 billion during the month.
In the second round during September and October, the HKMA used HK$155.66 billion to weaken the currency as a result of the devaluation of the yuan in August which prompted depositors to shift their yuan into the Hong Kong dollar.
The interventions of 2015 is three times bigger than last year’s HK$75.3 billion intervention and the HK$110 billion spent in 2012 – both also triggered by hot money inflows.
The record high intervention remains the 16-month period from September 2008 to December 2009 when the HKMA sold more than HK$620 billion to weaken the local dollar after large amounts of hot money flowed into the Hong Kong stock and property markets when the US kicked ott its monetary easing policy to fend off a recession after the global financial crisis.
Heng Koon-how, senior foreign exchange strategist of Credit Suisse, said the US Fed rate hiking cycle may provide welcome relief for the HKMA.
Heng said the Hong Kong dollar has been particularly strong in recent months due to the yuan’s devaluation as it tumbled 4 per cent this year and touched a 4-1/2 year low.
“Any potential capital outflows resulting from the Fed rate hike may help balance off this recent round of Hong Kong dollar strength. Overall, we maintain our neutral view of USD/HKD around 7.75,” Heng said.